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Accounting for stock-based compensation: an extended clean surplus relation

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  • Hess, Dieter E.
  • Lüders, Erik
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    Abstract

    Residual income valuation is based on the assumption that the clean surplus relation holds. As pointed out by Ohlson (2000), among others, the standard clean surplus relation is frequently violated. Moreover, standard residual income valuation models rest on the implicit assumption that future stated earnings belong to current shareholders only. This is clearly invalid for companies granting employee options. In order to overcome these deficiencies, this paper establishes an extension of the clean surplus relation and derives simple analytical solutions for the value of outstanding stocks in terms of already known accounting information. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 01-42.

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    Date of creation: 2001
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    Handle: RePEc:zbw:zewdip:5397

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    Related research

    Keywords: Residual income valuation; clean surplus accounting; US-GAAP; employee stock option programs;

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    1. Brenner, Menachem & Sundaram, Rangarajan K. & Yermack, David, 2000. "Altering the terms of executive stock options," Journal of Financial Economics, Elsevier, Elsevier, vol. 57(1), pages 103-128, July.
    2. Viral Acharya & Kose John & Rangarajan K. Sundaram, 1999. "On the Optimality of Resetting Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 99-087, New York University, Leonard N. Stern School of Business-.
    3. Aboody, David, 1996. "Market valuation of employee stock options," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 22(1-3), pages 357-391, October.
    4. Chance, Don M. & Kumar, Raman & Todd, Rebecca B., 2000. "The 'repricing' of executive stock options," Journal of Financial Economics, Elsevier, Elsevier, vol. 57(1), pages 129-154, July.
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    Cited by:
    1. Wayne Guay & Richard Sloan, 2003. "Accounting for Employee Stock Options," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 405-409, May.

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